CMBS Mortgages Lead Expansion of Commercial Lending in U.S.
According to CBRE, commercial real estate lending in the U.S. continued to grow in Q2 2017, led by a surge in CMBS mortgages.
Despite an increase in short-term interest rates by the Federal Reserve in June, capital markets remained favorable in Q2 2017, with rising equity prices, tight spreads and limited volatility.
The CBRE Lending Momentum Index, which tracks the pace of U.S. commercial loan closings, shows that loan closings edged higher between March and June, and are 27% above the year-earlier level. Volume improved across all major lending groups, as capital is readily available, with CMBS conduits leading all other lenders in terms of market share.
Reflecting the favorable capital market environment, CMBS issuance revived in Q2 2017, lifting year-to-date issuance to $38.8 billion and well ahead of 2016's pace of $30.7 billion. CMBS conduits accounted for 36% of non-agency origination activity in Q2 2017, well above their 16% market share in Q1 2017 and 10% market share a year earlier. While the increase included a large Manhattan office loan in Q2 2017, it generally reflects stronger industry wide CMBS origination volumes.
"The overall lending environment is well supplied with debt capital from all sources; CMBS, life companies, banks and alternative lenders are all actively issuing bridge and permanent financing quotes. The recent surge in CMBS mortgages demonstrated that these lenders are becoming increasingly comfortable with risk-retention rules that kicked-in at the end of last year," said Brian Stoffers, Global President, Debt & Structured Finance, CBRE Capital Markets.
Life companies also continued to post strong origination activity, accounting for more than 24% of non-agency commercial loan closings in Q2 2017. This level was down from their 38% market share in Q1 2017, but above their 20% share a year ago. Banks accounted for 18% of loan volume in Q2 2017, compared with 26% in Q1 2017 and almost 50% a year ago.
"We remain cautiously optimistic regarding commercial real estate debt availability for the second half of 2017. Debt is still attractive in terms of rates and spreads, while the yield curve has tightened significantly in the past six months. Lending terms remain reserved, with LTVs and DCRs in relatively conservative ranges compared with aggressive periods preceding significant downturns. Meanwhile, the supply/demand equilibrium is largely in check, with no massive overbuilding apparent in any sector," Mr. Stoffers added.